A Multifamily Complex Slashes Costs
An 876-unit apartment community in the Mid-Atlantic region was experiencing severe leaks in the potable water piping system. The owner had concluded that the system required replacement and was searching for the most cost-effective solution. In 2003, SageWater was asked to offer suggestions on how best to proceed.
Historical Utility Data & Costs: The 5-year average water consumption (1998 to 2002) was 64,679,000 gallons per year, with a standard deviation of 3% or less. Extrapolating from this data and applying 2005 water utility rates ($7.00 per thousand gallons), the cost of water would have been $452,753 in 2005, or $517 per unit.
The average annual gas consumption for powering the community's central boiler was 281,290 therms with a standard deviation of 7% or less. Applying actual 2005 natural gas prices, gas expense for 2005 would have been $506,340, or $578 per unit.
The Solution: The failing piping system was constructed with galvanized and copper piping, and extensive corrosion had virtually destroyed the integrity of the pipes. Since the potable hot water was supplied by a central boiler, SageWater reviewed the owner's water and water heating expenses and concluded that a “boiler conversion” was in order.
That is, rather than installing new piping in the same configuration as the existing, the new system would be configured such that each dwelling would be served by its own water heater. Water consumption by each unit would be measured with submeters, allowing the owner to make residents accountable for their personal usage. The central boiler would be abandoned.
The Project: The community contained 72 buildings, and as SageWater completed a building each week, the owner's staff would then begin the administrative process that would hold residents accountable for their personal water consumption. The construction project was fully complete by the end of 2004, and the submetering program was fully implemented by March of 2005. The project was completed ahead of schedule, and total change orders equaled 1.01% of the base contract.
Water Conservation: After the boiler conversion, 2005 consumption was 49,286,000 gallons, a decrease of 15,393,000 gallons, or 24%. [The owner was not holding all residents accountable for water consumption for the first few months of 2005; therefore, the owner anticipates even lower consumption in 2006.]
The reduced water consumption resulted in lower per-gallon charges by the municipality; therefore, the applicable rate for 2005 was $6.58 per thousand gallons, resulting in an additional 6.03% savings. Actual gross water expense for 2005 was $324,189, a 28.4% savings, before consideration of resident reimbursement.
Gas Conservation: After the conversion, gas consumption dropped to 523 therms, a reduction of 99.81%. [The remaining 0.19% reflects the gas consumed by the washers and dryers in the communal laundry facilities.] The average cost per therm in 2005 was approximately $1.80; this equates to a savings of $505,380 per year. The concept is simple— by powering the water heaters with the individual residents' electric panels, the cost of heating the potable water is transferred to the residents' individual electric bills.
Resident Accountability: Although the submetering program was not fully implemented, the owner recovered $282,159 from residents, or 87% of the annual water expense including water that served the common area facilities. The owner's net water expense after conservation and resident reimbursements was $42,030, a savings of $410,723, or 90.3%. As stated above, the cost of heating the water was transferred to each resident's electric bill, which made each resident 100% accountable for personal water heating expense.
Gross Financial Results: Although the resident accountability program was not fully implemented in 2005, the owner's water and gas utility expensed was reduced by $916,103 per year as a result of the boiler conversion program ($1,045 per apartment). Therefore, the utility expense savings equate to an ROI of 20.5%. Notably, the above ROI calculation and improvement to the owner's operating profits does not take into account some of the most significant cost savings and other bottom-line profit improvements, such as:
* Elimination of leak damage expenses (leak damage repair, resident concessions, etc.);
* Lower resident turnover rates, which increased occupancy rates (higher revenue) and lowered the cost of recruiting new residents (lower expenses);
* Improved levels of resident satisfaction, facilitating the owner's ability to increase rents.
If the value of these indirect but very tangible benefits are taken into account, this owner's actual ROI could exceed 40%.
Net Financial Results: If the owner had selected a conventional solution to the pipe decay problem—if he had simply replaced the pipes without reconfiguring for individual water heaters—residents would continue to waste water, and the owner would continue to pay to heat unlimited hot water. The cost of such a conventional solution would provide no returnon investment.
But due to the leaks, the owner had to take action—the system had to be replaced regardless of the return on investment. Boiler conversion cost less than $1,500 per unit more than conventional piping replacement. Therefore, the incremental investment of about $1,500 per unit yielded a return of $1,045 per unit in the first year—an immediate 70% ROI.
As with the “Gross Financial Results” the net ROI was achieved before accounting for elimination of leak damage expenses and the improvement to occupancy rates and gross rental income. Had the owner calculated the value of these indirect financial benefits, there is little doubt that his incremental or “net” ROI would exceed 140%. That is, the incremental cost of boiler conversion would pay for itself in only nine months.
Increased Property Value: The additional annual cash flow generated by the boiler conversion was $916,103 per year, or $1,045 per unit. At a capitalization rate of 7%, the value of this 876-unit community was increased by $13,087,000, or $14,939 per unit.